want to wait until our market heats up like the rest of the country…
Jennifer Van Evra
From Friday’s Globe and Mail Published on Thursday, Oct. 15, 2009 4:57PM EDT Last updated on Friday, Oct. 16, 2009 11:46AM EDT
There was barely time for buyers to think, let alone make a well-informed decision. The first showing of the small East Vancouver bungalow was on a Friday, the last on Sunday. Dozens of people milled through the modest 1956 home, which overlooks the weeping willows of John Hendry Park, and as the women winced at the 1970s-era faux wood panelling and burgundy shag carpet, and the men snuck second peeks at the girlie calendars in the basement, the realtor repeated his refrain: Inspections would be allowed Monday at 9 a.m., and offers would be considered the same afternoon. The implication? Get your questions out of the way, then bring us an offer with no strings attached.
“I saw it one day and the next day we had to write an offer,” says Van Cho, a home buyer who didn’t even have time to arrange an inspection, and found out just hours before making an offer that there was an old oil tank buried in the back yard – an issue that could cost tens, and even hundreds, of thousands of dollars to remedy if the soil was contaminated. “That was way too much pressure. I needed a couple more days, at least.”
Cho and her husband didn’t bow to the pressure to go in with a “clean” offer – theirs was subject to inspection, and stated that the oil tank was the owner’s responsibility – but the majority of the nine bidders did. The winning bid was nearly $200,000 over the asking price; the page that would normally include conditions on the sale subject to financing and inspection was blank.
It’s an increasingly familiar scenario for buyers navigating Canada’s newly reheated real estate markets: Hit a relatively desirable property, and you’ve got to go in with an unconditional offer or face losing out.
But many buyers are not aware that the practice can come with myriad hidden perils; and according to mortgage broker Paula Siemens, unless they’ve got big bucks in the bank, unconditional bidders may be putting themselves into serious financial jeopardy.
Firstly, many lenders are no longer offering formal pre-approvals – they went out with the economic downturn – so even if buyers are told they are prequalified, that doesn’t necessarily mean they will be approved when it comes time to seal the deal on a particular home.
Buyers who plan to put down less than 20 per cent are especially vulnerable, because they must carry mortgage insurance – but the Canadian Mortgage and Housing Corporation (CMHC) will only insure the property for its appraised value, and lenders will only provide a mortgage based on that same value.
In other words, if you get tangled in a bidding war over a $750,000 house, and you win with an $850,000-dollar unconditional offer, but the bank later decides the house is only worth $750,000, you’re on the hook for that extra $100,000 in cash, if you can get the mortgage at all.“We do everything we can to ensure the client is successful at obtaining financing. But the scary part is that when we get a clean offer, everyone looks at us and says, ‘Okay, now deal with it,’” says Vancouver-based Ms. Siemens. “One of my colleagues just had a client who went in clean with 95 per cent financing, against the advice of her broker, and CMHC declined it.”
But crumbling deals – and the lost deposits and lawsuits that could ensue – are not the only concerns for those who go in unconditionally. What’s hidden behind the walls and in the ground can also affect buyers’ ability to close the deal with the bank. By law, every mortgage is subject to fire insurance, and if the building contains old-fashioned knob and tube wiring, you may not be able to get that insurance, or a mortgage, until the electrical is updated. (Some insurers, however, offer temporary policies to allow time for upgrades.) If there’s an oil tank buried on the property, the bank may hold back the amount it will cost to remove the tank and remediate the soil – which could leave the new homeowners short.
And while many buyers are drawn to homes that include a rental suite, if that “mortgage helper” isn’t legal, most lenders will no longer take that rental revenue into account – so when it comes time to finalize the financing, purchasers who go in with a clean offer can be in for a nasty surprise.
“These are all very big cans of worms,” says Ms. Siemens. “So really, the only people who should be writing clean offers are people who, if push comes to shove, could write a cheque for the full purchase price.”
Not being able to secure financing is just one of the potential risks of going in unconditionally. While some would-be buyers are arranging inspections before making an offer – in the East Vancouver home last Monday morning, at least four inspectors were simultaneously scouring the house – others are forgoing inspections altogether. After all, if the roof looks okay, the electrical has been upgraded, and the furnace has been replaced, how bad could it be?
“There are 10 to 15 major areas of a house that can be very expensive to fix – and most of them are not easy to see,” says John Schiffer, a veteran home inspector in British Columbia’s Lower Mainland with Quality Home Inspections. “And sometimes there aren’t any major issues in a house – but you’ve got 10,000 little things that cost you just as much as changing the roof or the drain tiles, if not more.”
Those who buy newer homes aren’t off the hook either, says Mr. Schiffer. Many 1980s and ’90s houses were built with the same shoddy stucco-on-wood construction that caused the leaky condo crisis, so leaks and rot are common. “I have found a number of homes that didn’t look bad, but were leaking really badly. So you really need to look at the details – and I don’t think the average person would have any idea what to look for.”
Ms. Siemens is sufficiently concerned about the trend toward unconditional offers that she would like to see a mandatory three-day cooling off period in which prospective buyers can get inspections and finalize their financing. That’s not likely to happen any time soon, says Scott Russell, president of the Real Estate Board of Greater Vancouver, which represents area realtors. So for now, he’s encouraging buyers to get property inspections and firmly secure their financing before signing that blank conditions page – or don’t sign it at all.
“If I were buying a home and I didn’t have time for an inspection and the property disclosure statement wasn’t available, I would really have to evaluate whether it was going to work for me.” says Mr. Russell. “It comes down to managing risk – so you just do what you can to eliminate as much risk as possible.”